Photographer: Raquel Maria Carbonell Pagola/LightRocket via Getty Images

Draghi Meets Europe's Youth With Poor Pay Everyone's Concern

  • ECB president will meet students before policy forum in Sintra
  • Euro area still faces problem of economic slack curbing wages

Rita Rodrigues and Joao Franco expect to find work when they graduate from one of Portugal’s top universities, but they’re less confident about the pay.

“I don’t have very high expectations,” said Rodrigues, in the final year of an economics degree at the ISEG Lisbon School of Economics and Management. “I’m not going to earn a lot right from my initial job,” added Franco, who is completing a management degree, saying students have to “fight for the opportunities.”

Click here to set a reminder to watch a live stream of Draghi’s Youth Dialogue speech.

The two 21-year-olds might be considered lucky to be preparing to enter the workforce now, as a flood of European Central Bank stimulus cuts unemployment and buoys economic growth. If they want to know how long that monetary support will last and when pay might finally pick up, this is their chance -- ECB President Mario Draghi will visit the university on Monday on the way to his institution’s annual forum in nearby Sintra.

The trip will be a reminder of the problems still facing the euro economy even after more than four years of expansion. The region’s jobless rate is above 9 percent -- and almost 19 percent for young people. That’s dragging on wage growth and so curbing inflation. And southern European nations such as Portugal and Italy are largely faring worse than their northern neighbors.

It may all be enough to reinforce the ECB chief’s view that it’s too soon for policy makers to think about winding down their 2.3 trillion-euro ($2.6 trillion) bond-buying program, currently scheduled to run until at least the end of this year. He has already lamented that economic growth isn’t generating enough high-quality jobs.

“The ECB alone cannot solve the youth-unemployment problem, which is one of the bigger issues now,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “What they can do is make sure their policies keep the recovery on track and hope politicians will use it to create opportunities for young people.”

Policy Panel

After the Youth Dialogue, Draghi will travel to the hilltop resort of Sintra for the ECB Forum, where former U.S. Federal Reserve Chairman Ben Bernanke will speak at the opening dinner. The ECB head will give a keynote on Tuesday, before Executive Board members chair a series of academic panels on investment and growth. The event wraps up on Wednesday with a discussion between Draghi, Bank of England Governor Mark Carney, Bank of Japan Governor Haruhiko Kuroda and Bank of Canada Governor Stephen Poloz.

Data on Monday showed that German business sentiment surged to a record high in June and figures this week will likely back up the story of the euro-area economy humming along nicely in most respects except what matters most to the ECB: inflation that can be sustained and stable just below 2 percent.


IndicatorSurveyPrior
June 27Italian manufacturing confidence106.7106.9
June 28French consumer confidence
Spanish retail sales
103
2.2%
102
1.8%
June 29Euro-area economic confidence109.5109.2
June 30German unemployment
Euro-area inflation
5.7%
1.2%
5.7%
1.4%

Portugal is a case in point. The nation’s central bank last week raised its growth forecasts on stronger exports and investment, and unemployment has dropped to less than 10 percent from a high of 17.5 percent at the start of 2013. The rate for people aged 15-24 is down to 24 percent from more than 40 percent.

Yet in a sign of how far the recovery has to go to eliminate spare capacity, it’s likely to be 2019 before Portugal’s gross domestic product climbs above the level seen prior to the global financial crisis.

In the euro area as a whole, the ECB faces a similar dilemma. It published research in May showing the real level of unemployment, counting people who want to work more hours but can’t, could be around 15 percent. Wages are rising by only about 1.5 percent a year, and the ECB projects that consumer-price growth will average just 1.6 percent in 2019.

Output Gap

“For sure the world is changing, but the first-order factor for low inflation remains the slack in the economy,” said Marco Valli, an economist at UniCredit in Milan. “With growth recovering and actually surprising on the upside, the output gap should continue to close and that will eventually lead to some firming in price pressures.”

At its June 8 meeting, the Governing Council didn’t even discuss how and when it might taper its bond purchases from the current pace of 60 billion euros a month, and Draghi used his press conference to call for patience. The council sees no need to take a decision until at least September, euro-area officials familiar with the matter told Bloomberg this month.

That raises the risk of greater market volatility as December approaches without clear signals, and with speculation over how much of the bond market the ECB intends to hoover up.

“What is happening on the labor market is the biggest puzzle, but it’s also a global phenomenon,” said Karsten Junius, chief economist at Bank J. Safra Sarasin in Zurich. “The question is how much sense it makes to chase every government bond that’s still left.”

The ISEG students may wish to pay attention to that question. It’s already occupying one of their alumni -- ECB Vice President Vitor Constancio, who received his degree there in 1965 and went on to be assistant professor of economics until 1973.

Then again, they may have other things on their mind. While Rodrigues said she might attend the session with Draghi, Franco intends to skip it to focus on his next big challenge.

“We’re doing exams,” he said. “We’re all stressed with exams.”

— With assistance by Jana Randow

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